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a) When the growth g is zero, the dividend is capitalized. =. b) This equation is also used to estimate the cost of capital by solving for . = +. c) which is equivalent to the formula of the Gordon Growth Model (or Yield-plus-growth Model):
The justified P/S ratio is calculated as the price-to-sales ratio based on the Gordon Growth Model. Thus, it is the price-to-sales ratio based on the company's fundamentals rather than . Here, g is the sustainable growth rate as defined below and r is the required rate of return. [1]
As Gordon's model suggests, the valuation is very sensitive to the value of g used. [1] Part of the earnings is paid out as dividends and part of it is retained to fund growth, as given by the payout ratio and the plowback ratio. Thus the growth rate is given by
For example, the annuity formula is the sum of a series of present value calculations. ... This is the well known Gordon growth model used for stock valuation.
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The sustainable growth rate is the growth rate in profits that a company can reasonably achieve, consistent with its established financial policy.Relatedly, an assumption re the company's sustainable growth rate is a required input to several valuation models — for instance the Gordon model and other discounted cash flow models — where this is used in the calculation of continuing or ...
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